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Thursday, May 6, 2010

CNN: ObamaCare's Massive, Hidden Tax Change

CNN, Health Care Law's Massive, Hidden Tax Change:

An all-but-overlooked provision of the health reform law is threatening to swamp U.S. businesses with a flood of new tax paperwork.

Section 9006 of the health care bill -- just a few lines buried in the 2,409-page document -- mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.

The stealth change radically alters the nature of 1099s and means businesses will have to issue millions of new tax documents each year.

Right now, the IRS Form 1099 is used to document income for individual workers other than wages and salaries. Freelancers receive them each year from their clients, and businesses issue them to the independent contractors they hire.

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.

The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.

Taken together, the two seemingly small changes will require millions of additional forms to be sent out.

Update:

http://taxprof.typepad.com/taxprof_blog/2010/05/cnn-health.html

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Comments

How goofy is that?

Posted by: Leiton Powell | May 6, 2010 10:18:50 AM

Hello Paul,
Thank you for your article. Without trying to sound stupid, I wanted to ask why is issuing a 1099 a problem? Other than the paper work and man power it takes to do that paperwork, it seems like every transaction made is met with a form or some kind of "official" paperwork to back it up by doing it this way. Also, isn't that form a good way to keep companies honest, by not understating their expenses?

Posted by: Lisa Herkelmann | May 6, 2010 10:26:01 AM

Uh, no. 1099s are not issued for goods.

Posted by: Anonymous | May 6, 2010 11:58:04 AM

Better get the Pizza Dude's tax ID number

Posted by: johnp | May 6, 2010 3:10:53 PM

But what is the purpose? Are they laying the groundwork for a VAT by tracking purcases/sales?

Posted by: 4thGenerationBuck | May 6, 2010 3:12:57 PM

Sounds like some prep for a VAT tax to me.

Posted by: Syl | May 6, 2010 3:17:14 PM

The burden will be twice what you expect. Not only will millions of forms have to be sent out, millions will be received. How many forms will a company like Dell or Amazon get? What on Earth do we expect them to do with them?

Posted by: roy | May 6, 2010 3:22:48 PM

Oh, so THAT'S what those 16,000 new agents will be doing - while enforcing ObamaCare mandates.

Posted by: Paul in NJ | May 6, 2010 3:23:41 PM

Wonderful. Fantastic. So much for costs going down under Obamacare. You don't suppose that there is a secondary (primary really) goal to the application of these changes toward 1099s?

Posted by: James Palmer | May 6, 2010 3:23:56 PM

This is clearly the first steps towards enacting a VAT. Every transaction must be tracked to successfully enable a VAT. Our 1099 system is perfect to leverage and expand into a very probably VAT system for the USA. Is this good? If we all like the inflated economics of the present, then we'll have to swallow hard and take our VAT medicine.

Posted by: chuck | May 6, 2010 3:26:08 PM

As a semi-retired accountat to several small clients, I can tell you this will be a massive headache to owner-operated small businesses. (My clients are mostly one-man operations)

I usually compile 40-60 1099's for each of these clients. My estimate is that I will now have to do more than 300...each. It's one thing toting up the totals per vendor. But gathering the tax info is something else.

This will mean 250 more phone calls *per client* to obtain tax information from vendors. Most often, I have to leave a message. So I have to track messages left/returned. Then call back the ones who didn't respond. And the companies on the other end will have to add people for the same reason.


This is absurd. Do I issue a 1099 to the power company??? These clients are already hanging by a thread. The fees attached to this may likely be the final straw.

Posted by: jeanneb | May 6, 2010 3:28:28 PM

This is groundwork for a VAT. It's an absolute economy-wrecker. You're talking perhaps millions of man-hours devoted to paperwork. Small companies will be eaten alive by this provision. Another wonderful offering from the Marxist-socialists running Washington.

Posted by: Fresh Air | May 6, 2010 3:28:42 PM

I think everyone, everytime, we spend $600+ dollars, should send a 1099 to the recipient of the money. Pay the mortgage, send a 1099, pay the visa card, send a 1099, pay college tuition send a 1099. Send one to the IRS and one to the payee. Everytime no exceptions. If nothing else we can inundate the IRS with more work than they can handle, and keep the USPS in business. Ridiculous!

Posted by: Dog Bites | May 6, 2010 3:29:47 PM

And just how many free lancers or small business are in position to send 1099's to everyone place or thing that they have to deal with? Big companies will be swamped with generating them. But what the hey the government is going to own everything anyway -right?

Posted by: Rich | May 6, 2010 3:30:57 PM

This is going to make the CPSIA look like a couple of kids playing in a swimming pool.

Posted by: Grainger | May 6, 2010 3:34:18 PM

Why? What is the point?

Posted by: mike | May 6, 2010 3:36:20 PM

This was noted a few days ago by Coyote, who actually runs a small business and was mortified. Coyote also noted that "Rep. Dan Lungren (CA-3) introduced “The Small Business Paperwork Mandate Elimination Act” (H.R. 5141).", so perhaps folks should consider calling their Congress Critter to ask them to back HR 5141.

Posted by: Henry Bowman | May 6, 2010 3:36:40 PM


Why ?

Posted by: Dougger | May 6, 2010 3:38:07 PM

Completely naive guess (hey, I use TurboTax - I know nothing about really doing taxes):

This lays the paperwork foundation for a VAT.

Posted by: Hogarth | May 6, 2010 3:40:55 PM

For 1099s to become, as you suggest, ubiquitous to all financial activity in excess of 600 per recipient, would not just be to cause a huge burden in record keeping, mail, and reporting BUT -

Whether you were an individual, a small business or corporation, it would disclose to the IRS your complete financial activity and dealings.

Currently, such information can be requested when one is audited. That is a very different relationship with the IRS than we have currently. As someone in small business, I think that this would have ramifications that cannot be conceived of at this time.

First what comes to mind is that some scheme to reconcile 1099s against income might be attempted. They try to do this now, but it never works because the 1040 or 1120 does not detail income. So when the IRS asks "Where have you reported the $3400 on this 1099?" the answer is "In the 197,000 of gross income, idiot!"

Thus 1099s have largely been a meaningless and futile waste of time.

Posted by: Spendulus | May 6, 2010 3:54:45 PM

Millions of 1099s? That seems like a grotesque underestimate. As a worst-case back-of-the-envelope calculation, if the US GDP of 14.25 trillion dollars is divided into $600 transactions, then we'd need about 24 BILLION 1099s. So, we'll need something between the "millions" quoted and 24 billion. I would suspect at least 1 billion... Wow. When do we get to just ignore Congress? The idea that these clowns can actually do anything positive for the nation is unsupported by the evidence.

Posted by: Bo | May 6, 2010 4:00:15 PM

Forget "millions". According to the census, as of 2004 there were about 25 million "firms" in the country. If each averages only ten suppliers -- which seems conservative, since many tiny companies can be overshadowed by a single large one -- then we're talking about a quarter billion forms.

That's $85 million just in stamps.

Posted by: roy | May 6, 2010 4:04:20 PM

"It's an absolute economy-wrecker..... Small companies will be eaten alive..."
But the big, moribund companies will be OK. And they are easier to control, more susceptible to gov't pressure. This is the Euro model, slow growth, high barriers to entry, negligible innovation, ...
And see how well it's working for them?

Posted by: Jim,MtnViewCA,USA | May 6, 2010 4:12:54 PM

There's only one reason to do this. Put small businesses out of business. Once that's accomplished, VAT will be much, much easier to implement. When there are 10 companies left running 80 percent of the industry and they are controlled by the government, you only have to audit ten places. Big companies are much more likely to be compliant...after all, they have loopholes they wrote for themselves in the tax code.

How much did you make? Send it in.

Posted by: Concerned Citizen | May 6, 2010 4:15:15 PM

So every one of us who pays more than $600 dollars in FITA, FICA and Medicare taxes should send the IRS separate 1099's. Talk about unintended consequences overwhelming them.

Posted by: chemman | May 6, 2010 4:49:59 PM

How do you issue a 1099 to an illegal alien (sorry - undocumented worker) if they don't have an SSN or tax number?

Posted by: USN CaptRet | May 6, 2010 5:06:10 PM

We are all Greeks now.

Posted by: Jeff | May 6, 2010 5:20:23 PM

Several of Obama's econ advisors have championed "underpayment" of taxes by small businesses as a goldmine of revenue.

While it could be prep for a VAT it is really more of a war on small businesses, contractors and sole proprietors.

Just another "boot on the throat" of the economy. I don't question the goal (it is clear that small businesses under-report income) but the means and the timing leave much to be desired.

Posted by: Treeamigo | May 6, 2010 6:06:35 PM

Beat the rush. Buy stock in paper companies or timber producers now. I guess Nancy really was right that Congress had to pass the bill to find out what's in it.

Posted by: Green Sneeze | May 6, 2010 6:24:47 PM

Cato's estimates are far higher than "millions":
http://www.cato-at-liberty.org/2010/04/26/costly-irs-mandate-slipped-into-health-bill/

"A few wording changes to the tax code’s section 6041 regarding 1099 reporting were slipped into the 2000-page health legislation. The changes will force millions of businesses to issue hundreds of millions, perhaps billions, of additional IRS Form 1099s every year. It appears to be a costly, anti-business nightmare."

The article also notes that "for the first time, 1099s are to be sent to corporations." That means that businesses will also have to file 1099s with other businesses: "When a small shop owner pays her rent, she will have to send a 1099 to the landlord and IRS."

It's Carl Sagan's catchphrase: Billions and Billions.

Posted by: Paul in NJ | May 6, 2010 6:24:51 PM

"Also, isn't that form a good way to keep companies honest, by not understating their expenses?"

Except that it really hurts small businesses who can't keep an army of accountants on staff. It's just one more bit of !@#$ we have to keep track of...like everything else isn't enough.

But I suppose it's GREAT for big businesses, these little cuts kill the little guys off.

Posted by: CG | May 6, 2010 6:31:16 PM

I've taken the following resolution from the precinct and county conventions in Texas. It's starting to look a little prescient don't you think? It would be really nice to see an educated tax lawyer bash it so I can have more practice for the Texas State Republican platform committee. Please.

"Therefore, be it resolved that the Republican party declares that all payments, grants, tax abatements, services, or other benefits granted to individuals by the government, at any level, which exceed $500 in any year must be reported to the Internal Revenue Service by IRS Form 1099-GOV."

I think it is time for a FUNDAMENTAL TRANSFORMATION OF GOVERNMENT and I think this would do it. Non-partisan, fair, and it would finally shine a light on where all this stuff goes. No? Why?

Posted by: SenatorMark4 | May 6, 2010 6:34:17 PM

My company buys lunch almost every day so that we can keep working without losing 1-2 hours. Am I going to have to send a 1099 to the chinese takeout place, the pizza delivery service, Togos, and so on?

Posted by: TheOldMan | May 6, 2010 6:42:17 PM

I say we all send 1099's to B. Obama (or T. Geitnner) on Pennsylvania Ave and foist on him a gazillion dollar tax liability.

Which, of course, won't be paid. Taxes are for the little people.

Posted by: M. Rad. | May 6, 2010 8:45:13 PM

I say IGNORE IT. They cannot prosecute all of us.

If we comply, they they get what they want. If we swamp them with paper, they will just hire more paper pushers. So compliance feeds the beast. Better to starve it.

And massive non-compliance is a pretty effective way of "stickin it to the man".

Posted by: Dr. K | May 7, 2010 2:57:24 AM

Wrong on all counts, it is a smart tool to lay a foundation for the VAT tax, for businesses to declare all income, and all others to keep their deductions honest. This is a good for tax collectors and bad for tax cheats and the under the table economy.

Posted by: donnal | May 7, 2010 5:07:46 AM

If this change is NOT an error on the part the lawmakers - which they seem to make with higher frequency - then this is a PIPE DREAM!

No government or agency will have the capabilities to monitor, track, and reconcile, a volume of transactions on a scale of Visa & Mastercard.

Good luck.

Posted by: singlemalt_18 | May 7, 2010 5:34:52 AM

What is the IRS' ID number?

Posted by: glenny | May 7, 2010 6:33:03 AM

"Also, isn't that form a good way to keep companies honest, by not understating their expenses?"

Probably not. Furthermore,on the other hand, beyond the costs of sending 1099s, is the cost of a business reconciling the 1099s received with the revenue being reported. Many 1099s sent will have errors (in amount or vendor name or vendor TIN) that will require the recipient to ask for correction. Furthermore, accrual based companies or companies that pay a lot of bills in late December will report an amount to a cash basis taxpayer that will not be close to the actual revenue figure that should be reported by the recipient. (Or perhaps accrual basis businesses will recalculate 1099s on the cash basis (Quickbooks does that automatically - sort of). Will there be another schedule to file with a business return that reconciles 1099s received with revenue reported? Will the IRS send out notices automatically proposing an additional tax if the 1099s they receive regarding your business exceeds your reported revenue, as they do now . I wonder how many people, after selling a business, will continue to get 1099s since the sending company has their TIN still in its system. I suppose if you are a business that mostly has non-business customers this aspect of the new 1099 requirement will not be a major issue. Of course, you may get a lot of inflated 1099s from some of your business customers who need to substantiate additional expenses, aware that you will probably not reconcile 1099s to revenues. I suppose if I buy myself office supplies, computers, etc for home use and then decide to contibute these items to my business I can avoid sending a bunch of 1099s.

Posted by: Mike Phillips | May 7, 2010 7:08:39 AM

The current Congress seems to be the perfect combination of arrogant smugness and utter incompetence. Either that or they're all clinically insane.

Posted by: GregS | May 7, 2010 9:31:42 AM

I predict a lot of people buying only $599.00 worth of services or goods from any one supplier, to the point that they even buy power from multiple power companies, or buy separate parts and software for computers instead of whole computers.

I guess that will be a sort of redistribution of wealth....

Posted by: Maureen | May 7, 2010 9:45:46 AM

"This is absurd. Do I issue a 1099 to the power company???"
"Am I going to have to send a 1099 to the chinese takeout place, the pizza delivery service, Togos, and so on?"

If the new rules are as described, yes and yes.

Don't forget your cell phone company, ISP, janitorial company, temp agency, health insurer, property insurer, liability insurer, 401k administrator, retailers of every description, bookkeeper, and accountant.

The idea that there is a huge leak in the tax system on the business side is bogus, this law is pure harassment.

This sort of thing encourages both horizontal integration and offshoring (don't have to send 1099s to foreigners) just to reduce paperwork.

Posted by: Bob Smith | May 8, 2010 2:57:27 AM

Anyone who thought or still thinks that Obamacare is about health care is an absolute sucker or is a total Marxists, who understand that this is how the government will now know and control all aspects of our pitiful lives!!! These bums and their ilk need to be run out on a rail, never to be allowed back to surface to spread their slime ever again.

Posted by: "G" | May 8, 2010 6:09:29 PM